Meanwhile, the Federal Reserve is adding more and more garbage to its balance sheet every week. It’s trying to reinflate the last bubble by pumping massive amounts of money into the economy and slashing interest rates to the bone. And it’s expanding its tentacles into every corner of the credit markets. This is undermining the Fed’s independence and virtually guaranteeing that future rate decisions will be compromised by politics.

More worrisome: We could be staring down a significant wave of dollar devaluation and inflation, delivered by the Fed and sanctioned by academia. Heck, just this week two prominent economists — former White House adviser Gregory Mankiw and former International Monetary Fund chief economist Kenneth Rogoff — encouraged the Fed to let inflation get out of control. Rogoff suggested the Fed adopt a whopping six percent inflation target!

Are these guys nuts?

Look, we can’t control everything Washington does. But we can take steps to keep OUR finances from imploding, even if Washington insists on torpedoing its own. So this week, I’d like to share my suggestions on how to gird yourself for tough times ahead …

Step #1: Save More …

I’ll warn you right up front: This Money and Markets column will make liberal use of the “S” word. No, not that one. I’m talking about “savings!”

The Fed is doing all it can to destroy your savings. It’s taking steps that could crush the purchasing power of your dollars. And by driving interest rates to practically zero, it’s making it so your ultra-safe funds can’t generate much of anything in interest.

You can do one of two things:

Take the Fed’s bait and shovel your money into risky junk bonds or high-yielding CDs being offered by troubled banks. That could theoretically increase the yields your savings generate.
But doing so exposes you to significant principal risk if your deposits are uninsured or if junk bond prices fall. Is that really the best option?

Increase the amount of money you save to offset the loss of future interest income. This isn’t the “fun” way to confront the Fed’s assault on your savings. It takes dedication and a willingness to tone down your discretionary spending. But it’ll help fortify your balance sheet against the risk of a deeper economic recession — and give you the peace of mind so many folks are lacking today.
Mainstream economists would have you believe the second approach is almost un-American. They talk in Ivory Tower language of the “paradox of thrift” — the economic collapse that a widespread increase in savings would supposedly bring about.

I say you tell those guys to take a hike, and start saving more! We can’t keep living beyond our means as a country — or individuals — without consequences, no matter what those pointy-eared economists keep telling us.

Step #2: Borrow Smart …

I’ll be the first to acknowledge that savings can’t fund every purchase you need to make. Sometimes, you’re just going to have to borrow money. But here too, you have to make sure you don’t take the Washington approach. You know: Piling on more and more debt … spending more and more money you don’t have … and demonstrating absolutely ZERO concern for the potential consequences.

The Treasury may be able to get away with this for a while, though even that’s debatable. After all, the Treasury bond buyers we’ve always counted on to pony up to the bar are bidding less aggressively and extracting higher interest rates on newly issued debt.

What’s more, as an individual borrower, you don’t have the same market power as Uncle Sam. If you run your cards up to or near their credit limits, or you max out your home equity line of credit, chances are it’ll hurt your credit score. That, in turn, will lead to a re-evaluation of your creditworthiness. It’ll prompt existing creditors to cut your credit lines and new potential creditors to shy away. They might even offer you less money or charge you higher interest rates.

And don’t get me started on home loans …

Nowhere did borrowing get more out of control in recent years than in the mortgage arena. Borrowers let their appetites get the better of them. They borrowed too much money to buy too much house on too risky terms. As a result, foreclosure rates are exploding higher and people’s financial lives are being ruined.

If there’s anything good to come out of this whole sorry affair, it’s a lesson that serves as a warning to future borrowers. I hope you listen …

Simply put: If you can’t qualify for a 30-year fixed, fully amortizing mortgage … save up for a down payment of at least 5 percent or 10 percent … and restrict yourself to a monthly principal, interest, tax, and insurance payment that eats up no more than 28 percent of your gross monthly income, then I’ve got news for you. You should NOT be buying a home!

Greedy bankers will always try to find a way to subvert these rules so they can pad their own pockets. Don’t take the bait!

The same goes for loading your home up with other debt, such as second mortgages and equity lines of credit. These tools can have practical uses — such as home improvement, where the money you’re borrowing can possibly help increase the home’s value. But charging pizzas or trips to Aruba on your HELOC is a sure-fire way to get yourself into serious debt trouble, especially in a market where home prices are still tumbling.

I know this may not be exactly what you want to hear … but hear it you must. Because in these days of Washington insanity, the best thing we as individuals can do is take charge of our own finances — before they take charge of us!

Until next time,

Mike

Those who use the stock market to grow their assets have two choices. They can either be investors, which means they are “buy-and-hold” for the long term. Or, they are traders who try to use the ups and downs inherent in free markets to profit.

Buy-and-hold investors have much to worry about. Are they buying in at high prices? When they are ready to retire, will the markets be in a bear market? Obviously those who planned to retire in the years 2000 through 2009 faced a great dilemma.

Aggressive buy-and-holders who were invested in Nasdaq stocks, had lost 70-80% of their capital in 2000-2002 and then 50% in the 2008-2009 bear market. Even cautious S&P investors lost 50% in 2000-2002 and then another 50% in the 2008-2009 bear market.

Market timers, who are actually traders usually using mutual funds as their investment vehicle of choice, recognize these pitfalls. Their goal is never to give back much capital.

If you are trading trends (and historically the markets are in trends more than they are not) you will never take large losses to capital as you will exit immediately if the trend changes.

And… you will make big profits from the inevitable long term trends when they occur.

Two Kinds Of Market Timers

Market timers, trading all trends, are the most successful over time. But even in market timing, there are two ways to determine your trades.

Discretionary timers depend on the sum total of their market knowledge to make decisions. Whether it be market analysis, a multitude of indicators, gut feeling, current or even potential future news events, hot tips, etc.

Discretionary trades are subjective. They can be changed and second guessed. There are no absolute guarantees that each individual trade is based reality and is not colored by any personal bias.

Mechanical timers, which use timing strategies based on an objective and automated set of rules, avoid the emotional biases inherent in discretionary trading.

They follow a set of rules to get them into, and out of, the markets. They know that some trades will not be successful, but they also know that they will always be in for the big trades. The ones that make the money and over time make them successful timers.

Mechanical systems make life much easier by “removing” the emotional aspect.

Mechanical Strategies Are Based On Price

Mechanical timing strategies are based on “price.” There is no other information in the stock market that is absolutely correct at all times.

Price tells all. Price is always correct. Price has all the news, all the fundamental analysis, everything affecting stocks, already factored in.

It may seem a bit boring using a mechanical timing strategy. After all, where is the fun, the emotional highs, that many traders thrive on.

But let’s get one thing straight. Mechanical timing strategies, which use price to determine trends, are not about fun. They are not about emotion and in fact they are designed to eliminate emotion.

Mechanical trading strategies are about “making money.” Pure and simple.

They are about winning.

Following The Emotional Crowd

In fact, the entire stock market moves up and down because of millions of investors depending, for the most part, on emotional decisions. Fear and greed. That is why volume spikes near the tops of rallies, and again near to bottoms of corrections. Everyone is jumping on board.

There may be comfort in following the emotional crowd, but there is seldom profit.

Mechanical timing strategies, using “price” to determine buy and sell signals, actually “use” the emotional ups and downs of the market to make money.

The rallies and corrections are going to happen, so when we use price to tell us when they are happening, as trend traders we just jump on board and let the market take us along for our profits.

Conclusion

Discretionary traders sometimes have big winners. Toss a coin enough times and it always comes up heads eventually. But the only certain way to be successful for the long haul in the markets is to follow a “non-emotional” trading strategy and to always “stick-to-the-plan.”

There is no second guessing. There are no worries. We know the strategies work over any two or three year period and that can be proved with historical data going back a hundred years or more. In Fibtimer’s case real-time trading statistics going back into the 1990s’

Trend followers know that the markets are “in” trends most of the time. No one knows what will happen tomorrow, but trend traders “know” they will beat the markets and make great profits over time.

Frank Kollar
www.fibtimer.com

Technical analysis does nothing of the sort. A chart is a reflection of past prices, nothing more. In itself a graph cannot predict future price movements. A currency does not trade up or down because of a formation on a chart. It moves because market participants make basic assumptions about future price behavior based on the record of past price action. A charted history of price action is the cumulative story of thousands of trading decisions; it is a record of the past behavior of thousands of individual traders.

Price information is meaningful only because traders’ decisions give it predictive power. A simple proof of the limited forward intelligence of historical price action is the well attested notion that fundamental developments always trump technical analysis. If the Federal Reserve raises rates unexpectedly or the Chinese Government announces it will no longer buy US Treasuries there is no chart formation that has ever existed that will prevent the dollar from rocketing up in the first instance or plummeting in the second.

Technical analysis does not produce price movement. I state the obvious because in the endless attribution of trading cause and effect to ‘the market’ it is easy to lose sight of the actual composition of the market–thousands of individual decision makers. The translation mechanism for technical analysis runs from the information contained in a chart, through the assessment of that information by market participants to the trading behavior of those individual market participants.

Another way to approach this idea is to ask, just who is the ‘market’ and what is it trying to accomplish every day. It is likely that much of the $3.2 trillion daily volume in the FX market is speculative. Everyone in the currency market from the hedge fund trader with $1 billion under management, to the euro trader on the Deutsche Bank interbank desk to the retail trader in her study, is trying to do exactly the same thing, take home daily trading profits.

Interestingly, the overall worldwide foreign exchange trading volume in 2007, the year of the last measurement, increased almost 50% from the prior survey in 2004 of $1.9 trillion daily. The counterparty reporting segment to which retail foreign exchange belongs boosted its share of turnover to 40% from 33% according to Bank for International Settlements in Basel (BIS, 2007) which conducts the tri-annual survey.

To return to my previous point, if every market participant is attempting to do the same thing, namely wring trading profits from the day’s activities, how do they all go about it?

The first thing every trader does, in New York, Tokyo, London and in every land in between is to pull up charts and look for trading opportunities. Every trader looking for profit is judging the same charts. Everyone sees the same price history, and everyone identifies the same potentially profitable chart formations. And, in the absence of other factors, the majority of traders will come to the same trading conclusion based on the observed chart formations.

If euro has been in an up channel for two weeks and is approaching the bottom of the channel most traders looking for an opportunity in euro will bet on the continuance of the up trend and the maintenance of the channel. They will place buy orders just above the floor of the channel. And much of the time the charts will have been proven correct, the euro will indeed bounce from the floor of the channel. But it bounces not because, for instance, the ECB is expected to raise rates at some future date, but because of the fit between the goals, information and assumptions of the market’s traders.

Traders need profits, all charts contain the same information and all traders operate with similar assumptions about market behavior based on chart formations. If enough traders place their buy orders above the bottom of the channel it becomes likely that the euro will bounce off the floor of the channel and continue the upward channel formation, barring external events of course.

There is powerful self-fulfilling logic in technical analysis. It works, because everyone trading believes it will work and makes their trading decisions accordingly. For a retail trader this knowledge is the most accessible and effective trading strategy that exists.

__________________
Joseph Trevisani
Chief Market Analyst
FX Solutions, LLC
Joe@fxsol.com
www.fxsol.com

But defining a trend so that it can be profitably traded is something else entirely.

Many would say the U.S. Dollar is currently in a bearish trend. But at the same time, the Nasdaq Composite Index and S&P 500 Index are in a short term corrective downtrend after having rallied hard in a strong uptrend for some two months. So trends can obviously exist for one sector while another is going in the opposite direction, or no direction at all, and they can last for different periods of time.

Just saying that a trend consists of “rising” prices, or “declining” prices is not enough. Every day is different. A trend must be clearly defined in order to be profitably traded.

And what about time frame? Are we talking about a trend on a 5-minute bar chart where it could last an hour? Or is it of longer duration: days, weeks, or even years? If you are a mutual fund trader, trend lasting less than several months will be almost impossible to profitably trade.

It is easy to determine trends on an historical chart. Looking at trends that have already occurred. But developing a trading strategy that will keep you on the right side of future trends is needed to profit from trend trading (market timing).

Note that we do not say market timers can “predict” the future. We are not of the crystal ball camp that many say dooms market timers to failure.

Instead, we say that trends tend to last for periods of time that make them tradable. So identifying trends, and jumping on board, is the key to profitable market timing.

Successful market timers know and use several facts about trends that give them an edge in trading them:

1. While financial markets may spend time in consolidation (sideways trends), they are more often moving up or down for sustained periods of time.

2. A timing strategy that defines trends can be used to take advantage of continued momentum in the market place.

3. Trends tend to go higher, or lower, than most investors expect. So correctly identifying and trading a trend can be very profitable.

4. Profitable trends typically occur only once or twice a year. The rest of the time the markets trend sideways.

Because tradable trends only occur once or twice a year, market timers must be prepared to sometimes wait months before catching that one highly profitable trend.

a. To be consistently successful over time, market timers must have clear rules telling them when to enter, and when to exit.

b. When in a sideways trend, market timers may have multiple trades that result in small losses, or small gains. These small losses and gains “must” be accepted because timers “must” trade every identified trend change. There is no way to know “ahead of time” which trend will be the highly profitable one.

c. Market timers usually make the majority of their profits in only one or two trades a year. If you don’t take every trade, you will likely miss the one that makes most of your profits.

d. When the markets are in a bullish or bearish trend, trading position changes may not occur for months at a time as the trend progresses. Exiting early to lock in profits can cost you dearly. The trend must be allowed to play out without making unnecessary trades because of volatile short-term conditions.

e. A profitable trading strategy will “not” allow a market timer to miss that trade!

Correctly identifying and trading financial market trends with mutual funds, ETF’s and even carefully selected stocks, is doable, profitable, and with a well-tested trading strategy can achieve results far above “buy-and-hold” investing.

Market timing, when following a well thought out trading strategy, is actually “less” risky than a buy and hold approach.

The active investing style used in FibTimer’s market timing strategies (identifying and trading trends) prevents huge losses in the inevitable bear markets (or any large decline that is of substantial duration).

If bearish strategies are used in the timing strategy, declining markets actually add to profits as they did in our Bull & Bear Protimer Strategy in 2008 and early 2009..

Market timers, when following a well defined and tested timing strategy that identifies market trends, will consistently beat the market over any fair time frame.

Frank Kollar
editor www.fibtimer.com

If two parties wish to conduct an exchange, of one currency for another or of an equity or bond for a sum of cash the first question is at what price should the transaction take place? In the consumer world, in a supermarket or department store, the price is predetermined by the seller and is rarely changed. The purchaser measures their need for the item against the price asked and makes the decision to buy or not. There is little discussion and no bargaining over the price. The consumer does not say the price will be lower in a few minutes; I will wait until then to make my purchase. Likewise the seller does not normally remove the item from sale expecting the price to rise in a few days. This basic function of price determination or price discovery is essentially different in a trading market. A market transaction differs from a consumer purchase because both the seller and the buyer continually adjust their price expectations to information flowing out from the market to participants and into the market from outside sources.

Market participants, in theory, incorporate all available information into the prices at which they buy and sell. This is called the perfect information assumption of efficient markets theory. Each participant in the market acts as an independent decision maker. Each decision influences the overall market and price level. The market or to be more precise, the price level of a market traded item, is, at any time, the amalgamation of all the price decisions made by all market participants.

On this one topic– what should the market price be– the market reflects the decisions of its participants. In foreign exchange markets the decision makers are the traders, all of them, from the smallest retail trader to the largest hedge fund. But how do 1,000 or 10,000 individual decisions, made in ignorance of each other become a market price? How do we know that the price of this mass decision accurately reflects the wishes of 10,000 people?

If three market participants want to buy a commodity at a certain price level and 50 want to sell, the market price for that commodity will fall. But what actually happens? The three bids in the market will be filled but that leaves 47 sellers. If no other bids enter the market the sellers will begin to react to the lack of bids by adjusting their offering prices down, displaying lower and lower prices until buyers enter bids and a trade is made at the new lower level. The sellers and the buyers incorporated the information flowing out of the market, the temporary lack of bids, into their price expectations producing a new price.

A commentator would perhaps say ‘the market fell today ‘. But a market is not an entity. It is only a method for coordinating the decisions of its participants. What occurred is that each participant in the market reacted to the information coming to them from within the market and their combined reaction is the movement in price. It appears to an observer that the ‘market’ traded lower because the thousands of individual decisions that comprise the movement are not given separate life. Only the mass decision, ‘the price’, is represented.

This sense of the decision making power of markets and of the ‘market’ a living entity is reflected in the terms we use to describe the price action. We often say’ ‘the market reacted badly to the news’ or ‘the market took profit today’. We personify the market and its behavior. Of course we know that there is no “market” somewhere below the pavement on Wall Street making the decisions for the stock exchange. But the common use of this ‘market’ shorthand tends to obscure what is the most important psychological point in understanding market behavior. Namely, that the ‘market’ is a picture of the thoughts of its participants, the market is a snapshot; it is a mass mind.

We can remove some of the sense of mystery from the term, “the market” when we remember just who or what ‘the market’ is. The answer is plain enough, to paraphrase the comic strip character Pogo, “we have met the market and he is us’. The logic, analysis and fear that motivate market behavior have their source within the mind and psychology of market participants, that is, within each of its traders.

When analyzing market behavior it is instructive to keep this very simple fact in mind. The market is a mass mind focused on one topic, price. It represents the momentary culmination all of the external and internal inputs that bear on the price of the traded commodity as ranked by the traders in that market. But even if the method by which the market arrives at a decision is obscure, its ingredients are not—they exist in the analysis, outlook, aspirations and psychology of each individual trader.

Since the market is a reflection of the minds of its participants and a traders job is to make profits it follows that a trader’s primary task it to match his decision to that of the mass, to anticipate and mimic the decision of the market. There should be no mystery in ‘the market’ even when it thrashes our positions, for the chances are that the operating logic was known to most traders. Known and rejected by the losing minority of traders but embraced by the majority.

When our trades lose money, whatever the logic of the position, we can be sure we were not alone. But we can equally be sure that we were in the minority. Had we been in the majority the market would have performed as we had anticipated. The market decision process is that simple. It is a matter of putting our assumptions in line with the majority as often as we can. The most effective tool to achieve that is our own empirically tested market psychology. We are the market, if only we can let the mass mind of the market and not our individuality rule our decisions.

The market does not reward iconoclasts.

__________________
Joseph Trevisani
Chief Market Analyst
FX Solutions, LLC
Joe@fxsol.com
www.fxsol.com

So today I want to tell you about index weighting. This may sound like a dry subject, but it’s important. As you’ll see, different weighting strategies can make a big difference to your success.

What Do We Mean By “Weighting?”

Weighting is simply the way stocks are distributed in a portfolio. If, for instance, you have a million dollars and you decide to invest $300,000 in a stock, we would say you have a 30 percent weighting in that stock.

An index is nothing more than a publicly-available list of stocks that are weighted according to some sort of strategy. The S&P 500, for example, consists of 500 large U.S. stocks that are selected by a committee at Standard & Poor’s.

Like most indexes, the S&P 500 is “cap-weighted.” Each stock receives an allocation equal to its proportional market capitalization — the total value of all outstanding shares at the latest price.

We’ll use ExxonMobil (XOM) as an example. As of August 31, 2009, all of the shares of XOM put together were worth about $337 billion. Do this same calculation with the other 499 companies in the S&P 500, and the sum total was almost $9 trillion.

This means that ExxonMobil was roughly 3.8 percent of the total value of the S&P 500 on that day. If you owned an ETF based on the S&P 500, such as the SPDR Trust (SPY), you essentially had 3.8 percent of your money in XOM. The rest was split among the index’s other stocks.

With hundreds of stocks in the index, it’s obvious that a few large companies like XOM dominate the portfolio. The remaining ones get very small allocations — a fraction of a percent in most cases.

This is the drawback to cap-weighted indexing: The bigger companies get an outsize share. That’s great if those companies perform well, but not so great if they run into trouble.

To address this problem — and hopefully attract investors — some ETF sponsors have developed alternative weighting schemes. None are perfect, of course, but they can be very useful at times. Here are five for you to consider:

Alternative #1:
Equal Weighting

This approach is strikingly simple: Just divide the money between all the stocks in an index equally. If your index consists of 50 stocks, each one gets 2 percent.

Equal weighting was pioneered by Rydex, which offers a series of ETFs using this methodology. Rydex S&P Equal Weight ETF (RSP) owns the same stocks as the S&P 500 but with equal-weighting rather than cap-weighting.

Comparing SPY vs. RSP reveals how big the difference in returns can be …

In the first eight months of 2009, SPY (including dividends) was up 15 percent. RSP gained 29 percent during the same period.

How does this happen?

The smaller-cap stocks get a bigger weighting in RSP than they do in SPY. And those stocks have done generally better this year than most of the mega-cap issues. This isn’t always the case. But equal weighting clearly had a huge positive impact so far this year.

In addition to RSP, here are some other equal-weighted ETFs you might want to consider:

SPDR S&P Biotech ETF (XBI)

First Trust Nasdaq-100 Equal Weighted Fund (QQEW)

SPDR S&P Semiconductor ETF (XSD)

Alternative #2 and #3:
Dividend and Earnings Weighting

If you love income, then you’ll probably want to tilt your portfolio toward the stocks with a record of growing their dividends. So take a look at the ETFs offered by WisdomTree.

WisdomTree argues that, by design, cap-weighted ETFs are forced to buy high and sell low. Here’s why that’s true:

The higher a stock’s market capitalization (shares outstanding multiplied by the share price), the more shares a cap-weighted ETF buys. If those share prices decline, the market capitalization of the stock declines as well. Consequently, they are replaced with higher-cap stocks when the ETF rebalances its portfolio.

WisdomTree’s solution is a set of indexes that use fundamental factors like dividends and earnings to allocate among stocks. They think this will lead to better long-term results, and they have a lot of research to support their point.

One advantage of this approach is that dividends and earnings are much more objective than stock prices as a way of measuring a company’s success. We’ve all seen stocks launched into orbit by irrational investors chasing surging stock prices, only to come crashing back down.

Dividends aren’t so easily manipulated. And screening for companies with consistent earnings can help weed out the money-losing and speculative ones.

WisdomTree has a whole family of ETFs that follow variations on this theme. Some of the most popular are:

WisdomTree Dividend excluding Financials (DTN)

WisdomTree India Earnings Fund (EPI)

WisdomTree Emerging Markets SmallCap Dividend (DGS)

Alternative #4:
Revenue Weighting

Another methodology is offered by a company called RevenueShares. The name gives away their strategy: Stocks in their ETFs are weighted by revenue.

Revenue is even more resistant to manipulation than earnings. In accounting lingo, it’s the “top line” of money coming in. Public companies are required to disclose it in their SEC filings, so the information is readily available.

RevenueShares says that weighting stocks by their revenue can deliver attractive returns over time. Though of course it doesn’t mean their strategy will work all the time. Here are some of the best-known RevenueShares ETFs:

RevenueShares Small Cap (RWJ)

RevenueShares Mid Cap (RWK)

RevenueShares Large Cap (RWL)

Alternative #5:
Combinations of Fundamental Weightings

Alternatives #2 — #4 discussed above are sometimes referred to as fundamental weighting. Rob Arnott, of Research Affiliates, has created fundamentally weighted indexes using a combination of factors such as sales, book value, dividends, and cash flow. And he has teamed up with FTSE to offer the FTSE-RAFI indexes.

Some of the ETFs using this approach include:

PowerShares FTSE-RAFI US 1000 (PRF)

PowerShares FTSE-RAFI Emerging Markets (PXH)

PowerShares FTSE-RAFI US 1500 Small-Mid (PRFZ)
For longtime investors, cap-weighting is what they know. And that may describe you, too. After all, it’s familiar. But staying open to new ideas can pay off in the long run. So take a look at these alternative-weighting strategies … you may find something you really like.

Best wishes,

Ron Rowland

The RSI is calculated as such: the RSI = 100 / (1 + D(P,n)/U(P,n)), where U(P,n) – is a moving average of the rising of the “P” (price) within “n”, (time) periods, D(P,n) – is a moving average of falling of the “P” (price) within “n” (time) periods. Popular periods of time can vary from from 9 days to 25 days. Fourteen days are the most popular although most technical traders use a 10 day period. By using the formula above, this indicator trades between value lines of 0 and 100. The oversold line is normally at 30 (and below) and overbought line at 70 (and above). Touching or exceeding these two zones are warning signs of a very possible market reversal. Of course, you would like the price to move out of those zones before making a transaction.

Be aware that reaching those line indicators does not automatically mean you should buy or sell. Again, it just indicts whether it is over sold or over brought. The market could stay at the 30 or 70 level for an indefinite period of time. However, if a value reaches at or above 90%, that would likely indicate an overbought condition that should trigger a selling signal. Conversely, a result under 10% shows an oversold condition. This should trigger a buy signal.

There is another way to use the RSI indicator and that is by looking for divergence signals. Divergence signals are moving back towards those zones we talked about earlier. For instance, if the RSI reaches 30 look for bullish divergence, a slowly rising RSI against the still declining prices. Here again, the same would be true as we approach the 70 level except that we would have a bearish divergence. The RSI divergence hints to us that current momentum is over. At this point, traders should look to protect their profits and be ready to trade in the opposite direction. Divergence does not occur at every turning point but at significant turning points.

Please note that as with all technical analysis tools, the RSI should not stand alone. It should be used in together with other tools to offer a more solid trading decision for traders like you to enter into new trades or protect profits already gained.

Happy Trading!

View a sample Forexoma weekly report
It is a real weekly report taken, with permission, from the Forexoma platform

The MACD – Moving Average Convergence/Divergence indicator – is one of the oldest tools in the technical analysts toolbox. It was devised by Gerald Appel in the 1960s and has seen decades of use by traders and lots of study into its strengths and weaknesses. All charting packages provide it as one of the standard Forex signals.

How It Works

The MACD is simply the difference between a 26 period exponential moving average (EMA) and a 12 period EMA. The MACD is normally graphed along with a Signal Line, which is a 9 period EMA of the MACD itself. The period is decided by the trader. It can be based on 60 minute, 4 hour, 1 day or longer periods.

The MACD, being the difference between a short term moving average and a longer term moving average, is a trend following indicator. With the addition of the signal line the MACD can be used to generate several trading signals.

MACD Trading Signals

• MACD crossing the zero line – the MACD crossing up through the zero line is bullish, and when it crosses down through the zero line it is bearish.
• MACD crossing the signal line – the MACD crossing up through the signal line is considered a buy signal and when it crosses down through the signal line it is seen as a sell signal
• Divergence between MACD line and price – if the price makes a new low but the MACD doesn’t, this is a positive divergence and is interpreted as bullish. Likewise, if the price makes a new high and the MACD doesn’t this is a negative divergence and is bearish.

MACD Trading Signal Precautions

A large part of the popularity of the MACD is that the trading signals are easy to interpret, but they cannot be followed blindly. Since the market crash in 2000 the general trading consensus is that the MACD should not be used on its own to make trading decisions, but as triggers to look at other indicators for confirmation of market movement.

For example, the signals from an MACD over a short time period, like a 15 minute chart, should be confirmed by looking at 1 hour, 4 hour or even 1 day charts. If the same signal appears in a longer period chart, then it is time to look for further support, perhaps through candle patterns or support and resistance levels.

MACD Periods

The standard periods for the EMAs used in the MACD are 12, 26 and 9. These were chosen by Appel in the 1960s for the stock market and his time period was measured in days. They are not written in stone and are not necessarily the values that will generate the most accurate signals for your market.

We are not going to recommend any values for any currency pairs here, as they change with market conditions, but it is something you should consider and research.

Summary

The MACD is a great trading tool. Its strength is in pointing you towards trading opportunities as they arise. However, don’t rely solely on its signals. Instead of using the MACD as a signal to buy or sell, use it as a signal that it is time to look deeper into the market.

What is Forexoma?

View a sample Forexoma weekly report
It is a real weekly report taken, with permission, from the Forexoma platform

What is currency correlation?

The interdependence among currencies stems from more than the simple fact that they are in pairs. While some currency pairs will move in tandem, other currency pairs may move in opposite directions, which is in essence the result of more complex forces.

The correlation coefficient highlights the similarity of the movements between two parities.

It is a number ranging from -100 to +100.
A correlation of +100 implies that the two currency pairs will move in the same direction 100% of the time. A correlation of -100 implies the two currency pairs will move in the opposite direction 100% of the time. A correlation of zero implies that the relationship between the currency pairs is completely random.

Regardless of your trading strategy, it is very important to keep in mind the correlation between various currency pairs and their shifting trends.

If the correlation is high (> 80) and positive then the currencies move in the same way.

If the correlation is high (> 80) and negative then the currencies move in the opposite way.

If the correlation is low (< 60) then the currencies don’t move in the same way.

The correlation index are calculated on the daily and hourly data. Thanks to the tools offered by Mataf.net, you will be able also to calculate the correlation of a pair compared to a basket of currencies and to study more precisely the correlation between two parities.

Examples of same direction moving currency pairs are:

EUR/USD and GBP/USD
EUR/USD and NZD/USD
USD/CHF and USD/JPY
AUD/USD and GBP/USD
AUD/USD and EUR/USD

Typical inversely moving pairs are:

EUR/USD and USD/CHF
GBP/USD and USD/JPY
GBP/USD and USD/CHF
AUD/USD and USD/CAD
AUD/USD and USD/JPY

How to use currency correlation in your everyday trading

1. Avoid trades that cancel each other.
   For example, EUR/USD and USD/CHF have got a very high inverse correlation (< 90). There would be no point to go short or long on both.
2. Use this information to open “backup trades”.
   If you are long on EUR/USD and the pair is trying to invert the trend, you may want to open a small long position on USD/CHF to tamper small losses.
3. Diversify risks in trades.
   Choose two pairs that move with a correlation coefficient of about ±70. They don’t move the same, but they’re still quite linked together. Splitting the orders will preserve trader’s positions from sudden “jumps” in price and as these currencies move not 100% identical a trader will have some time to react adequately.

Have a look at this classic online test for traders offered by Marketpsych:

Take the Trader Personality Test

It is a standard 60 item personality test followed by 15 brief simulated trading decisions. The full personalized report describes your unique personality traits and your vulnerability to common trading “biases”. Your report offers suggestions for improving problematic tendencies in your trading.